How to Calculate PIPS?

Beginner Questions
1

Hi There

I am learning FX from BabyPips.

While going through the lesson How the heck do I calculate profit and loss?

Let’s buy U.S. dollars and Sell Swiss francs.

The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ask” price of 1.4530, or the rate at which traders are prepared to sell. So you buy 1 standard lot (100,000 units) at 1.4530. A few hours later, the price moves to 1.4550 and you decide to close your trade.
The new quote for USD/CHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “bid” price of 1.4550. The price traders are prepared to buy at.

[B]The difference between 1.4530 and 1.4550 is .0020 or 20 pips.[/B]

Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

From my point of view it should be 200 pips e.g. 0.0020 x 100,000 = 200 PIPS.

Any Suggestion or Correct me if I am misunderstanding.

Regards
Shahzad

2

Hey mate, a pip is one ten-thousandth of a unit. So instead of .002 x 100,000 like you have, it is .002 x 10,000 = 20 pips.

You calculated the number of pipettes, or points (of which there are 10 per pip).

3

Hello, Shahzad. — Welcome to this forum.

Regarding your question…

A pip is a tiny fraction [B](one ten-thousandth)[/B] of the price [I]of a particular pair.[/I] In the case of your example, one pip is one ten-thousandth of the price of the US dollar as quoted in Swiss francs.

I’ll use the incorrect terminology “buy” and “sell”, meaning “go long” and “go short”, because it’s convenient to do so. But, please understand that retail forex traders do not buy or sell currencies, or currency pairs.

Back to your question.

In your example, you said that you bought the USD/CHF at a price of 1.4530 Swiss francs, and you sold the USD/CHF at a price of 1.4550 Swiss francs.

A pip is 1/10,000 of a price. Therefore, 1.4530 = 14,530 pips. And 1.4550 = 14,550 pips. So, [I]you could have said[/I] that you bought the pair at 14,530 pips, and you sold the pair at 14,550 pips.

Clearly, your profit was 20 pips (14,550 - 14,430 = 20).

[B]Furthermore, your profit in pips has nothing to do with the size of your position.[/B]

You earned 20 pips on a position size of one standard lot (100,000 units of USD/CHF). If your position size had been [I]one mini-lot[/I] (10,000 units of USD/CHF), your profit still would have been [I]20 pips.[/I] If your position size had been [I]one micro-lot[/I] (1,000 units of USD/CHF), your profit still would have been [I]20 pips.[/I]

Position size determines how much each pip is worth, not how many pips were earned in a particular trade.

As you correctly calculated…

…one pip (in a standard lot) was worth $6.87 in the trade in your example.

If you had been trading one mini-lot, instead of one standard lot, then one pip would have been worth $0.69 (rounded off). And, if you had been trading one micro-lot, then one pip would have been worth $0.07 (rounded off).

So, it makes no sense to do the following calculation:

I hope this clears up your confusion.

1 Like
4

Hi Jadd806

Thanks for clearing the point.
So to calculate pips I should use 10,000 whatever position or lot size i have as explained by Clint below.

Can you explain what you mean by
[B]You calculated the number of pipettes, or points (of which there are 10 per pip).[/B]

Regards
Shahzad

5

Hi Clint

Thanks for Detail explanation.

As far my calculation is concerned, I was converting the fraction to PIPS by using formula 0.0020 x 100,000 = 200 PIPS
which was Wrong. I should go for 0.002 x 10,000 = 20 PIPS.

Any way Thanks again.

Regards
Shahzad